Preemptive strike against class certification leads to case dismissal

The 6th Circuit decision in Pilgrim v. Universal Health Card in November 2011 provides good precedent for challenging multistate plaintiffs’ class certification in a consumer protection case early in the proceeding. A motion to strike the class allegations could lead, as it did in Pilgrim, to early case dismissal.

Claiming to represent a class of more than 30,000 consumers from 25 states, Daniel Pilgrim and Patrick Kirlin, residents of Pennsylvania and Mississippi, respectively, sued an Ohio company, Universal Health Card, and Georgia-based Coverdell Inc., a marketing services company, in Federal District Court in Akron, Ohio. The named plaintiffs alleged the companies had used deceptive advertising in creating and marketing a health care discount program. They claimed that health care providers listed in the discount network were not part of the program, and that newspaper advertisements, designed to look like news stories, were deceptive.

The plaintiffs cited violations of an Ohio consumer protection act as well as its common law prohibition against unjust enrichment. Consumer class actions commonly allege state consumer protection law violations because the Federal Trade Commission Act and other federal consumer protection statutes do not provide a private right of action.

The defendants moved to strike class allegations at the outset of the case, before discovery, arguing there was a clear flaw in the case that would preclude certification. In granting the request, the district court rejected the plaintiffs’ contention that only Ohio state law should apply. Instead, the court said the laws of all 25 states where members of the proposed class lived would have to be applied, an unmanageable proposition. The 6th Circuit affirmed that ruling.

“The fact that Pilgrim held that the need to apply many states’ laws makes a class uncertifiable is not news,” says J. Russell Jackson, a Skadden partner. “What is news is that the 6th Circuit held that you can make this determination at the outset of the case, and you don’t have to wait for class discovery to happen and then have a plaintiff move for class certification.”

The strategy helped save the defendants hundreds of thousands of dollars in legal fees and expenses, according to Gary Corroto, a partner at Tzangas, Plakas, Mannos & Raies, who represented Universal. “If the claims had been successful, they would have driven Universal out of business,” he adds.

Protecting Consumers

In rejecting the plaintiffs’ argument that Ohio law should apply to the entire class, the 6th Circuit cited a 1984 Ohio Supreme Court ruling saying “the State with the strongest interest in regulating such conduct is the State where the consumers—the residents protected by its consumer-protection laws—are harmed by it.”

“Nearly every court to have considered the question rejects the ‘manufacturer’s residence’ argument as being contrary to consumers’ expectations and ultimately unfair,” says Skadden Partner John Beisner. “That position would ultimately result in one state cramming its law down on absent class members.”

The plaintiffs’ argument would provide “bizarre results,” says Beisner. “For example, if you went to a dealership in Missouri and bought a motorcycle made by a Korean company, would anyone expect that any claims regarding that transaction would be governed by Korean law? Under this approach, states would have an incentive to enact laws that would protect their home state companies. Thus, most automobile sales would be governed by Michigan law, which might enact laws very favorable to its most important industry.”

Unwieldy Proposition

Once the court adopted the prevailing view that the law in each of the consumers’ states would apply, the plaintiffs were sunk. Rule 23 of the Federal Rules of Civil Procedure provides that parties seeking class recognition must show that “questions of law or fact common to class members predominate over any questions affecting only individual members.”

To analyze each class member’s claim under the law of his home state “would make this case unmanageable as a class action and would dwarf any common issues of fact implicated by the lawsuit,” said the 6th Circuit in affirming the district court decision.

“If one court had to try to apply the law of 25 states, that alone would have made the case unmanageable since consumer protection laws vary from state to state,” Corroto says.

The plaintiffs argued on appeal that they should have been allowed to have class discovery and to file their own motion for class certification in their own time. But the 6th Circuit noted that Rule 23 encourages a decision “at an early practicable time” in the litigation. While in some cases class discovery is required to decide the certification issue, in this case it was obvious that discovery would not change the ultimate result, the 6th Circuit added.

“Where it’s obvious from the pleadings that such a class could not be certified, the 6th Circuit held that a trial court has the discretion to grant a defendant’s motion to strike class allegations at the outset of the case,” Jackson says.